Two-Step Plan to Fix the Economy
Two-Step Plan to Fix the Economy
August 7, 2011
What if the biggest problem with the U.S. budget fiasco is a failure of imagination?
Sometimes I wonder if we’re like an audience at a magic show. The magicians in Washington D.C. are making us focus on budget cuts and tax hikes as if those are the only alternatives. Hypothetically, if a creative budget alternative exists, it would be effectively invisible because no one is looking for it. You wouldn’t bother looking for something that you can’t imagine.
I’m going to describe a third alternative just to help you imagine that such a thing might be possible. It’s a simple, two-step plan that costs nothing and doesn’t involve the government in any way. I think you’ll agree that’s a big advantage. The plan starts with a question:
1. How much would the rich need to voluntarily increase spending on products and services in the United States, including business spending and investment, to stimulate the economy enough to balance the budget over time without a tax increase or crippling budget cuts? I’m looking for a simple and dirty percentage. Is it 10%? 30%?
2. Once we have that estimate from a credible source, such as a respected economist, I’ll blog about it in a way that is interesting enough for the media to pick up on the idea. That part is easy because the media is running out of newsworthy angles for the budget story. A creative idea that isn’t ridiculous would spread quickly.
That’s the whole plan. It’s deceptively simple to describe. The complicated part is explaining why a plan that is so simple would work. You probably see a dozen potential problems with it. Let’s discuss the obvious ones.
First, why would the rich volunteer to spend more? The quick answer is that it’s in their self-interest to keep the economy humming along. But there are two good reasons why the rich don’t jump in right now and save the economy with extra spending:
1. The target is unclear. The rich don’t know how much they would need to increase spending in order to stimulate the economy enough to balance the budget.
2. Each rich individual knows that one person’s spending can’t influence the entire economy, and there’s no reason to think other rich people would join the cause.
Our hypothetical economist could solve the first problem by giving the rich a clear spending target. Let’s say the number is something like 10% extra spending per rich person. One problem is that rich wouldn’t know with any precision whether or not they were reaching their personal spending target. There would be a lot of guessing involved. We can deal with that imprecision by revising the target up or down after a quarter or two to get the right approximate effect.
A related problem is that an economist’s estimate of how much the rich have to spend to stimulate the economy and balance the budget is likely to be very wrong. That’s exactly the sort of thing no one can accurately predict. But in some cases – and this is probably one of them – you don’t need accurate information to influence the change you want. You just need a target that moves people in the right general direction. Economies need direction, not precision.
The next problem is the Prisoner’s Dilemma. Any individual rich person is best served by choosing not to spend any more than he normally would. That way, if no one else spends extra, he is no worse off. And if everyone else does spend more, he still gains from the rising economy. He’s a free rider.
But here’s where the media and peer pressure comes in. By analogy, I don’t know a single household that doesn’t bother to recycle, even though it’s a pain in the ass, and even though one household’s effort makes no real difference to the planet. The secret is that people WANT to help the planet. It’s in our nature. We enjoy feeling as if we are making a difference in something important. It literally feels good.
The media could encourage the rich to get with the plan just by doing lots of human interest stories about millionaires patriotically spending extra money in unexpected ways. And I would expect lots of peer pressure on millionaires to boost spending. Psychology matters. At the moment, being rich feels like being an unscrupulous douche bag. I think most rich people would happily pay extra to instead feel like patriot engines of the economy.
Another incentive for the rich to voluntarily increase spending is that it might ease the helpless feeling they get from watching Congress furiously working on a plan to destroy civilization. Personally, I’d pay a lot to make that feeling go away. And if the side benefit is a healthier economy, I’d stand a good chance of making back my money and more.
Another problem with the plan is that not all spending is equal in terms of economic stimulus. How can we be sure the rich will spend the right way? We can’t. But we also can’t predict the long term impact of tax increases or budget cuts. No plan has the luxury of being predictable.
The key to making this voluntary spending plan work is keeping government out of it. The last thing you want is President Obama encouraging rich people to spend more. That makes it a Democrat plan and dead on arrival. The same is true if the Republicans back it. The idea only works if no notable politician embraces it. Luckily, I think we can depend on our elected officials to ignore any plan that has a chance of working.
You’d also have the problem of pundits conflating this plan with President Bush’s suggestion after 9/11 that people should keep shopping so the terrorists don’t win. (You’ll probably see that snarky comparison in the comments to this blog.) But I don’t see that as a deal-breaker.
Part of the reason this idea has been hiding in plain sight is that, as I mentioned, our so-called leaders are making us focus on the binary choice of higher taxes or draconian budget cuts. And the ability to organize something of this nature without government involvement is fairly new, thanks to the Internet. It caught Egypt by surprise earlier this year.
Keep in mind that economies turn on expectations. All we need is a plan that looks somewhat credible. Once we have that, even the non-rich will start spending more. We wouldn’t necessarily need a high voluntary participation rate by rich people as long as the rest of the country believes the effort is going to build some momentum in the right direction. Optimism would do the rest.
I think the United States has an imagination problem, not a spending or tax problem. Let’s start by imagining citizens can solve the budget problem without the help of our government. If someone credible can tell the rich how much more they need to spend on their own families and their own businesses to save civilization, I can imagine people rising to the challenge. I’ve lost all hope in government, but citizens are still reasonably awesome.